SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
______________________________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
Commission File No. 0-20097
ARC CAPITAL
A California Corporation
IRS Employer Identification No. 33-0256103
2067 Commerce Drive
Medford, OR 97504
Telephone: (541) 776-7700
______________________________________
Indicate by checkmark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes [x] No [ ]
On March 31, 1996, registrant had 10,722,107 shares of Class A Common
Stock and 120,584 shares of Class B Common Stock, all no par value,
issued and outstanding.
<PAGE>
<TABLE>
ARC Capital
Consolidated Balance Sheets
<CAPTION>
March 31, December 31,
1996 1995
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,409,000 $ 4,171,000
Accounts receivable, net 2,812,000 1,904,000
Inventories 7,916,000 3,810,000
Prepaid expenses and other assets 1,046,000 506,000
____________ _____________
Total current assets 13,183,000 10,391,000
Property, plant and equipment, net 5,829,000 4,693,000
Goodwill and other assets, net 2,866,000 2,544,000
____________ ____________
$ 21,878,000 $ 17,628,000
============ ============
</TABLE>
<TABLE>
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,367,000 $ 769,000
Accrued liabilities 4,219,000 845,000
Customer deposits 3,306,000 1,083,000
Accrued payroll 575,000 374,000
Warranty reserve 434,000 408,000
Current portion of notes payable 78,000 22,000
____________ ____________
Total current liabilities 10,979,000 3,501,000
____________ ____________
Long-term liabilities:
Notes payable, less current portion 7,967,000 4,875,000
____________ ____________
Shareholders' equity:
Common stock:
Class A - no par value: 60,000,000
shares authorized; 10,722,000
and 8,718,000 shares issued and
outstanding at March 31, 1996, and
December 31, 1995, respectively 24,966,000 22,966,000
Class B - no par value: 3,000,000
shares authorized, 121,000 and
705,000 shares issued and
outstanding at March 31, 1996,
and December 31, 1995,
respectively 78,000 458,000
Class E - no par value: 3,000,000
shares authorized, 0 and 497,000
shares issued and outstanding at
March 31, 1996, and December 31,
1995, respectively 0 326,000
Common stock warrants 2,171,000 3,112,000
Additional paid in capital 2,797,000 1,500,000
Accumulated deficit (27,080,000) (19,110,000)
____________ ____________
Total shareholders' equity 2,932,000 9,252,000
____________ ____________
$ 21,878,000 $ 17,628,000
=========== ===========
<F1>
See Accompanying Notes to Unaudited Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
ARC Capital
Consolidated Statements of Operations
<CAPTION>
Three Months Ended March 31,
1996 1995
<S> <C> <C>
Net sales $ 3,613,000 $ 2,726,000
Cost of sales 2,134,000 1,895,000
____________ ___________
Gross profit 1,479,000 831,000
____________ ___________
Operating expenses:
Selling and marketing 814,000 492,000
Research and development 818,000 380,000
General and administrative 883,000 465,000
Goodwill amortization 95,000 93,000
Charge for acquired in-
process technology 6,088,000 0
Charge for royalty
expense 647,000 0
____________ ____________
9,345,000 1,430,000
____________ ____________
Loss from continuing
operations before other
income and expense (7,866,000) (599,000)
Other income and expense:
Gain on rescission of
stock compensation 0 732,000
Investment and other
income 68,000 28,000
Interest expense (172,000) (64,000)
____________ ____________
Income (loss) from continuing
operations before income
taxes (7,970,000) 97,000
Provision for income taxes 0 0
____________ ____________
(Loss) income from
continuing operations (7,970,000) 97,000
Loss from discontinued
operations 0 (26,000)
____________ ____________
Net (loss) income $ (7,970,000) $ 71,000
============ =============
Net (loss) income per share:
Continuing operations $ (0.81) $ 0.01
Discontinued operations -- --
________ __________
Total $ (0.81) $ 0.01
======== ==========
Weighted average shares
outstanding 9,899,000 9,706,000
========== ===========
<F2>
See Accompanying Notes to Unaudited Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
ARC Capital
Consolidated Statements of Cash Flows
<CAPTION>
Three Months Ended March 31,
1996 1995
<S> <C> <C>
Cash flows from operating
activities:
Net (loss) income $ (7,970,000) $ 71,000
Loss from discontinued
operations 0 26,000
____________ __________
Income (loss) from
continuing operations (7,970,000) 97,000
Adjustments to
reconcile net income (loss)
to net cash used in
operating activities:
Cash outflows related
to discontinued
operations 0 (111,000)
Charge for in-process
technology 6,088,000 0
Charge for royalty expense 647,000 0
Depreciation and
amortization 232,000 202,000
Gain on rescission of
stock compensation 0 (732,000)
Changes in assets and
liabilities (net of amounts
purchased in acquisition):
Accounts receivable 527,000 (1,387,000)
Inventories (671,000) (112,000)
Prepaid expenses and
other assets (667,000) 87,000
Accounts payable, accrued
liabilities, customer
deposits,accrued payroll,
and warranty reserve 913,000 1,959,000
__________ ___________
Net cash (used in)
provided by operating
activities (901,000) 3,000
__________ ___________
Cash (used in) provided by
investing activities:
Acquisition of Pulsarr (3,897,000) 0
Purchases of property and
equipment (160,000) (137,000)
Repayments of notes receivable 0 93,000
__________ _________
Net cash (used in)
investing activities (4,057,000) (44,000)
__________ __________
Cash provided by (used in)
financing activities:
Notes payable to bank and
others, net 176,000 (7,000)
Proceeds from common stock
issuances 2,000,000 0
Proceeds from exercise of
stock options 20,000 0
__________ __________
Net cash provided by
(used in) financing
activities 2,196,000 (7,000)
__________ __________
Net (decrease) in cash (2,762,000) (48,000)
Cash and cash equivalents,
beginning of the period 4,171,000 790,000
__________ __________
Cash and cash equivalents, end
of the period $1,409,000 $ 742,000
========== ==========
<F3>
See Accompanying Notes to Unaudited Consolidated Financial Statements.
</TABLE>
<PAGE>
ARC CAPITAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Principles Of Consolidation
In the opinion of the management of ARC Capital (the "Company"
or "ARC"), the accompanying consolidated financial statements,
which have not been audited by independent accountants (except for
the balance sheet as of December 31, 1995), reflect all
adjustments (consisting of normal recurring accruals) necessary to
present fairly the Company's financial position at March 31, 1996,
and December 31, 1995, the results of operations and cash flows
for the three month periods ended March 31, 1996 and 1995. The
financial statements include the accounts of the Company and its
three wholly-owned subsidiaries, Applied Laser Systems, Inc.
("ALS-Oregon"), SRC VISION ("SRC"), and Pulsarr Holding BV
("Pulsarr"), the latter from its March 1, 1996, acquisition date.
See Note 8 regarding the sale of ALS-Oregon in October 1995.
Certain notes and other information are condensed or omitted
in the interim financial statements presented in this Quarterly
Report on Form 10-Q. These financial statements should be read in
conjunction with the Company's 1995 annual report on Form 10-K.
Certain reclassifications have been made to the fiscal 1995
financial statements to conform with the financial statement
presentation for fiscal 1996. Such reclassifications had no effect
on the Company's results of operations or shareholders' equity.
2. Nature Of Operations
The Company's ALS-Oregon subsidiary, which designed,
developed, manufactured and marketed laser diode devices,
incorporating its visible laser module, and "no-light" products
based on technology for illumination with infrared laser systems,
was sold in October 1995 -- see Note 8.
In February, 1994, the Company acquired all of the issued and
outstanding capital stock of SRC for $8,100,000 in cash. SRC
designs, manufactures and markets computer vision-aided sorting
and defect removal equipment for use in a variety of industries,
including food processing, wood products and recycling. SRC's
systems combine optical and mechanical systems technologies to
perform diverse scanning, analytical sensing, measuring and
sorting applications on a variety of products such as food, wood,
glass, and plastic.
On March 1, 1996, the Company acquired all of the issued and
outstanding stock of Netherlands-based Pulsarr for approximately
$7.8 million in cash and notes. Pulsarr is a manufacturer and
seller of computer vision aided sorting and defect removal
equipment similar to that produced by SRC.
3. Financing
In April 1995, the Company borrowed $2,160,000 pursuant to a
convertible subordinated secured note. Interest on the note is
10.25% and is payable semi-annually. The principal amount is due
in April 1997. The note is secured by the issued and outstanding
capital stock of SRC. The note is convertible into the Company's
Class A Common Stock at $1.875 per share. In connection with the
borrowing, the Company paid a finders fee of $160,000 and issued
300,000 warrants to purchase Class A Common Stock at $1.875 per
share.
In April 1996, the Company borrowed $3,400,000 pursuant to a
convertible secured note. Interest on the note is 6.75% and is
payable quarterly. The interest rate may be adjusted upward on
each anniversary date of the note if the market price of the
Company's Class A Common Stock fails to reach certain levels. The
maximum possible coupon interest rate is 11.25% if none of the
market price thresholds are met. The principal amount is due in
April, 2001. The note is secured by 54% of the stock of ARC
Netherlands B.V., a wholly owned subsidiary of the Company
established to purchase Pulsarr. The note is convertible into the
Company's Class A Common Stock at $2.125 per share. The conversion
price may be adjusted downward if the market price of the
Company's Class A Common Stock fails to reach $2.125 for any 30
consecutive days during the 12 months following the date of the
note. In connection with the borrowing, the Company paid a finders
fee of $306,000 and issued 340,000 warrants to purchase Class A
Common Stock at $2.125 per share.
4. Stock Transactions; Shares Eligible For Future Sale; Effect
Of Warrants, Options And Convertible Securities; Possible Dilution
In February 1995, Liviakis Financial Communications, Inc.
returned approximately 668,000 previously issued and outstanding
shares of ARC Class A Common Stock pursuant to an award in
arbitration in favor of the Company. A gain of $732,000 was
recorded in February 1995 relating to the shares recovered.
In March 1996, the Company sold 1,400,000 shares of its Class
A Common Stock in a private Regulation S offering to foreign
investors at $1.625 per share, the market price on the date the
related Subscription Agreement was entered into. In connection
with the private placement, the Company paid finders fees and
other costs of $650,000 and issued 240,000 warrants to purchase
Class A Common Stock at $2.00 per share.
On February 15, 1996, the Company redeemed all 497,094 shares
of its Class E Common Stock for nominal consideration. Also on
that date, the 3,002,906 Class E Warrants to purchase Class A
Common Stock ceased to exist because escrow conditions related to
the warrants were not met.
Schedule of Outstanding Stock, Warrants, Units and Potential
Dilution: The following table summarizes, as of April 17, 1996,
outstanding common stock, potential dilution to the outstanding
common stock upon exercise of warrants, UPO Units and convertible
debt, and proforma proceeds from the exercise of warrants and UPO
Units.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Proforma
Number or Principal Class A Common Proceeds
Amount Outstanding Conversion Stock After Conversion or Debt
Security at April 15, 1996 Factor Conversion Price Reduction
Common Stock:
Class A 10,722,107 10,722,107
Class B 120,584 120,584
__________
Total currently
outstanding 10,842,691
__________
Warrants:
A 2,941,963 1.4 4,118,748 $ 2.84 $11,697,000
B 4,354,863(A) 1.4 6,096,808 4.17 25,424,000
C 846,250 1.4 1,184,750 2.21 2,618,000
D 275,000 1 275,000 2.75 756,000
F 300,000 1 300,000 1.88 564,000
G 240,000 1 240,000 2.00 480,000
H 340,000 1 340,000 2.13 724,000
Gerinda 300,000 1 300,000 5.00 1,500,000
Laidlaw 135,000 1 135,000 2.25 304,000
__________
12,990,306
__________
Unit Purchase
Options: 120,000 6.38 766,000
Class A Common 186,000 2 372,000
A Warrants 372,000 1.4 520,800 2.84 1,479,000
B Warrants 558,000 1.4 781,200 4.17 3,258,000
__________
1,674,000
__________
Convertible Debt:
10.25% Notes $ 2,160,000 1,152,000 1.875 2,160,000
6.75% Notes 3,400,000 1,411,764 2.125 3,400,000
__________ __________
2,563,764
__________
Potentially outstanding
shares and proforma proceeds
and reduction of debt 28,070,761 $55,130,000
========== ===========
<F5>
(A)Includes 1,412,900 outstanding plus 2,941,963 assuming
exercise of the Class A Warrants.
</TABLE>
The proforma amounts above are for illustrative purposes only.
Unless the market price of ARC's Class A Common Stock rises
significantly above the exercise or conversion prices, it is
unlikely that any warrants or unit purchase options will be
exercised or that the debt will be converted.
On April 15, 1996, ARC had outstanding options to purchase
2,899,000 shares of Class A Common Stock, 2,637,000 of which are
under its stock option plans.
The existence of these outstanding warrants, options, and
convertible debt, including those granted or to be granted under
ARC's Stock Option Plans or otherwise, and potentially issuable
shares pursuant to antidilution provisions of warrant agreements
could adversely affect ARC's ability to obtain future financing.
The price which ARC may receive for the Class A Common Stock
issued upon exercise of options and warrants, or amount of debt
forgiven in the case of conversion of debt, may be less than the
market price of Class A Common Stock at the time such options and
warrants are exercised or debt is converted. For the life of the
warrants, options and convertible debt, the holders are given, at
little or no cost, the opportunity to profit from a rise in the
market price of their Class A Common Stock without assuming the
risk of ownership. Moreover, the holders of the options and
warrants might be expected to exercise them at a time when ARC
would, in all likelihood, be able to obtain needed capital by a
new offering of its securities on terms more favorable than those
provided for by the options and warrants.
5. Acquisition Of Pulsarr
On March 1, 1996, the Company acquired all of the outstanding
capital stock of Pulsarr for approximately $7.8 million in cash
and notes payable. The acquisition is accounted for under the
purchase method of accounting. The $7.8 million purchase price was
allocated based on the fair values of the identifiable assets of
Pulsarr as follows: $1.3 million represents the net assets of
Pulsarr, $6.1 million represents acquired in-process
technology which was subsequently charged to operations in the
quarter ending March 31, 1996, and the remainder of $0.4 million
represents goodwill to be amortized over 15 years. Goodwill
amortization for the three month period ended March 31, 1996, was
$2,000.
The consolidated results of operations for the three month
period ended March 31, 1996, includes Pulsarr's results of
operations beginning on March 1, 1996.
The pro forma condensed combined statements of operations,
shown below as supplemental information, assumes the acquisition
of Pulsarr occurred as of the beginning of the three month
periods. However, the pro forma combined balances are not
necessarily indicative of balances which would have resulted had
the acquisition occurred as of the beginning of the three month
periods presented. Pro forma condensed combined statement of
operations for the three month periods are as follows:
<TABLE>
<CAPTION>
Three months ended March 31,
1996 1995
Proforma Proforma
<S> <C> <C>
Sales $ 4,871,000 $ 5,029,000
Cost of sales 2,642,000 2,763,000
____________ ___________
Gross profit $ 2,229,000 $ 2,266,000
============ ============
Net (loss) income $ (1,813,000) $ 18,000
============ ============
(Loss) earnings per
share $ (0.17) $ 0.00
======== =======
</TABLE>
The $6.1 million charge for in-process technologies is
excluded from the above pro forma statement of operations.
6. Inventories
Inventories are stated at the lower of cost or market and
include material, labor and related manufacturing overhead. The
Company determines cost based on the first-in, first-out (FIFO)
method.
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
<S> <C> <C>
Raw materials $ 2,158,000 $ 1,242,000
Work-in-process 2,075,000 889,000
Finished goods 3,683,000 1,679,000
___________ __________
$ 7,916,000 $ 3,810,000
=========== ===========
</TABLE>
The increase is due principally to the addition of Pulsarr in
the current period.
7. Income Taxes
The Company has net operating loss carryforwards of
approximately $16,800,000 which may be used to offset taxable
income, if any, in future years. The Company does not expect its
U. S. taxable income in 1996 to exceed the net operating loss
carryforward available, therefore the Company's U. S. effective
tax rate for 1996 is zero. Netherlands taxable income for 1996
will be taxed at a statutory 35% rate.
8. Discontinued Operation
In October 1995, the Company sold the laser diode operations
of its ALS-Oregon subsidiary to Coherent, Inc. for approximately
$1,052,000 in cash which represented the net book value of the
operation. Operating results for this discontinued business have
been excluded from the Consolidated Statements of Operations to
present separately the results of continuing operations. The
results of ALS-Oregon for the three months ended March 31, 1995,
are summarized as follows:
<TABLE>
<CAPTION>
3 Months Ended
March 31, 1995
<S> <C>
Net sales $ 868,000
Loss from operations of
discontinued business $ (26,000)
</TABLE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
In October 1995, the Company sold its laser diode operation
for cash in an amount equal to the book value of net assets and
liabilities sold. The operations of the ALS-Oregon have been
classified as a discontinued business. On March 1, 1996, the
Company acquired Pulsarr. The discussion below pertains to the
ongoing operations of ARC, namely SRC, Pulsarr and the holding
company, with Pulsarr included from its acquisition date.
The Company's backlog at March 31, 1996, was $6,947,000, an
increase of 6% when compared to the $6,527,000 backlog as of March
31, 1995.
Results of Operations - Comparison between three months ended
March 31, 1996, and March 31, 1995
Sales for the three months ended March 31, 1996 ("Q1 1996")
were $3,613,000 up 33% when compared to sales for the three months
ended March 31, 1995 ("Q1 1995") of $2,726,000. The increase is
due to increased demand for SRC's products as well as the
inclusion of $428,000 of Pulsarr's sales from its acquisition
date.
Cost of sales was 59% of sales in Q1 1996 and 70% in Q1 1995.
The decrease is primarily due to a spreading of fixed costs over a
larger sales base and better margins on non-food industry systems.
Gross profit increased by 78% to $1,479,000 in Q1 1996 when
compared to $831,000 of gross profit in Q1 1995. In Q1 1996,
gross profit was 41% as compared to 30% in Q1 1995.
Selling and marketing expense increased 65% in Q1 1996 from Q1
1995 to $814,000 amounting to 23% of sales in Q1 1996. Similar
expenses in Q1 1995 were $492,000 or 18% of sales. The increase
in percentage in Q1 1996 is due primarily to increased
demonstration equipment costs of $125,000 and higher commission
costs.
Research and development expenses were $818,000 and $380,000
in Q1 1996 and Q1 1995, or 23% and 14% of sales, respectively. The
larger research and development level in Q1 1996 was due
principally to the continuing development of SRC's SPECTRA-SORT
(Registered Trademark) system, as well as its Advanced Vision
Processor.
General and administrative expenses increased $418,000 to
$883,000 in Q1 1996 from $465,000 in Q1 1995. The increase in
general and administrative expenses is due to an increase in
personnel costs and legal fees, as well as the addition of
Pulsarr.
As discussed in the Notes to the Financial Statements, on
March 1, 1996, the Company acquired Pulsarr for approximately $7.8
million. Approximately $6.1 million of the purchase price was
allocated to in-process technology, which was charged to expense.
This charge is not deductible for tax purposes. The Company
expects to invest additional development efforts related to the
in-process technology to make these technologies commercially
successful. These expenditures are expected to be paid out through
1997 and will be funded primarily from cash generated from
operations.
In Q1 1996, the Company wrote off $647,000 of deferred royalty
expenses relating to certain technologies as all royalties have
been earned and the Company believes that no significant future
economic life exists relating to the royalty agreement, as the
result of changing technologies. See Liquidity and Capital
Resources below.
The net loss for Q1 1996 was $(7,970,000) as compared to net
income of $71,000 in Q1 1995, primarily as a result of the
nonrecurring charges for in-process technology and royalty
expense.
Liquidity and Capital Resources
In March 1996, in conjunction with the acquisition of Pulsarr,
the Company received $2,000,000 from the sale of 1,400,000 shares
of Class A Common Stock pursuant to a private placement. In April
1996, the Company received $3,000,000 representing the net
proceeds of a private placement of a convertible debt. In October
1995, the Company received approximately $1,052,000 from the sale
of its laser diode operations. In April 1995, the Company received
$2,000,000 representing the net proceeds from a private placement
of convertible debt. The cash generated from these transactions is
being used to finance the acquisition of Pulsarr and to provide
funds for working capital purposes.
The Company's principal sources of operating capital have been
funds from the above transactions, its overseas Regulation S
offerings in September and October 1993 and 1994, its initial
public offering in March 1992, and prior to the public offering,
from capital contributions and advances from the Company's
principal shareholders, private placements, and loans from
investors. As of March 31, 1996, the Company had $2,204,000 in
working capital.
As a result of the settlement in July 1992 of a lawsuit
alleging certain patent infringements, SRC entered into a royalty
agreement, pursuant to which SRC will pay royalties of 7% of its
vision system sales through the earlier of June 30, 2003, and the
date at which aggregate royalty payments equal $1,600,000. Until
aggregate royalty payments equal $1,600,000, maximum annual
royalty payments are $400,000 through 1996. To date, $1,200,000
has been paid. The remainder of the maximum royalty of $400,000
will be payable in June 1996. During the quarter ended March 31,
1996, the Company wrote off against income $647,000 of deferred
royalty expense related to the settlement as all royalties had
been earned and no significant future economic life is estimated
to exist.
The Company intends to continue to market its vision systems
technology and products, and will evaluate selected acquisition
opportunities. Additional investments will be required for capital
equipment, marketing and R & D for the Company to remain
competitive. For example, funds must be expended to complete
development of the Company's Advanced Vision Processor ("AVP") to
enhance the Company's ability to effectively compete in certain
markets with Key Technology Inc.'s (the Company's principal
competitor) recent product introduction. Furthermore, if the
Company consummates a technology intensive acquisition, additional
equipment and R & D investments may be necessary, perhaps to a
greater extent than for the Company's existing operations.
The Company's ALS-Oregon operation, ARC's only business prior
to the February 1994 acquisition of SRC, had suffered losses since
inception. The operations of ALS-Oregon were sold in October 1995.
In 1995, SRC generated operating profits (before allocation of
platform overhead expenses). Even though SRC reached operating
profitability in three of the last four quarters and had a history
of profitable operations prior to its acquisition by ARC, there
can be no assurance that long term profitability will be realized.
Pulsarr has operated profitably since 1990. The Company operates
in a highly competitive environment, and delays and difficulties
relating to technological changes and turnaround situations often
occur, any of which would materially and adversely affect the
Company's cash flow. Furthermore, operational and marketing
difficulties may occur relating to the integration of the recently
completed acquisition of Pulsarr.
The acquisition of Pulsarr occurred on March 1, 1996. In
connection therewith, the Company has paid, through April 15,
1996, approximately $5,128,000 to the sellers, and will be
required to pay an additional amount of approximately $1,175,000
on May 31, 1996, for total cash payments in 1996 of approximately
$6,303,000. Cash received from the March and April 1996 placements
of stock and notes detailed above generated approximately
$5,000,000. The balance of the cash payments of approximately
$1,303,000, plus costs related to the acquisition of approximately
$300,000, will be paid from the Company's current cash balances.
Prior to 1995, the Company had a history of negative operating
cash flow. The Company believes it may operate at a negative cash
flow during certain periods in the future due to the need to fund
certain development projects, cash required to enter new market
areas, cash needed to complete the acquisition of Pulsarr, and
possible cash needed to fully integrate Pulsarr's operations.
However, management believes that the Company has sufficient cash
to enable the Company to sustain its operations and to adequately
fund the cash flow expected to be used in operating activities for
the next twelve months. Until the Company is able to consistently
generate sustained positive cash flow from operations, the Company
must rely on debt or equity financing.
In connection with the acquisition of Pulsarr, the Company
wrote off approximately $6.1 million of acquired in-process
technology in the first quarter of 1996. This non-recurring charge
contributed to a substantial reported loss in that quarter, even
though sales for such quarter, including Pulsarr from the March 1,
1996, acquisition date, increased from the prior year's first
quarter.
The Company is seeking additional financing; however, there
can be no assurance the Company will be able to obtain any
additional financing on terms satisfactory to the Company, if at
all. The recent increases in (i) outstanding shares of the
Company's Class A Common Stock due to private placements, (ii) the
April 1995 and April 1996 private placements of convertible debt,
(iii) a substantial loss in the first quarter of 1996, and (iv)
the number of securities issuable upon exercise of warrants and
convertible debt may limit the Company's ability to negotiate
additional debt or equity financing.
Cautionary Statements and Risk Factors
The Company may, from time to time, make forward looking
statements that involve risks and uncertainties. Factors
associated with the forward looking statements which could cause
actual results to differ materially from those stated appear
below. Readers should carefully consider the following cautionary
statements and risk factors.
History of Losses; Negative Cash Flow: Prior to 1995, the
Company had a history of losses and negative operating cash flow.
The Company believes it may operate at a negative cash flow in the
future due to (i) the need to fund certain development projects,
such as the AVP, (ii) cash required to enter new market areas,
(iii) cash needed to complete the acquisition of Pulsarr, and (iv)
possible cash needed to fully integrate Pulsarr's operations.
Until the Company is able to consistently generate sustained
positive cash flow from operations, the Company must rely on debt
or equity financing.
Although the Company achieved profitability in 1995, there can
be no assurance as to the Company's profitability on a quarterly
or annual basis in the future. Furthermore, the non-recurring
expenses in early 1996 will result in a significant loss for the
1996 year.
Need for Additional Financing: The Company is seeking
additional financing; however, there can be no assurance the
Company will be able to obtain any additional financing on terms
satisfactory to the Company, if at all. The recent increases in
(i) outstanding shares of the Company's Class A Common Stock due
to private placements, (ii) the April 1995 and April 1996 private
placements of convertible debt, (iii) a substantial loss in the
first quarter of 1996, and (iv) the number of securities issuable
upon exercise of warrants and convertible debt may limit the
Company's ability to negotiate additional debt or equity
financing.
Uncertain Ability to Manage Growth and Integrate Acquired
Businesses: As part of its business strategy, the Company intends
to pursue rapid growth. On March 1, 1996, the Company acquired
Pulsarr which had sales in 1995 of approximately $11.4 million,
which would have added approximately 60% to the Company's 1995
sales on a pro forma basis. This growth strategy will require the
integration of new entities, such as Pulsarr, the establishment of
distribution relationships in foreign countries, expanded customer
service and support, increased personnel throughout the Company
and the continued implementation and improvement of the Company's
operational, financial and management information systems. There
is no assurance that the Company will be able to attract qualified
personnel or to accomplish other measures necessary for its
successful integration of Pulsarr or other acquired entities or
for internal growth, or that the Company can successfully manage
expanded operations. As the Company expands, it may from time to
time experience constraints that will adversely affect its ability
to satisfy customer demand in a timely fashion. Failure to manage
growth effectively could adversely affect the Company's financial
condition and results of operations.
Rapid Technological Change; Product Development: The markets
for the Company's machine vision products are characterized by
rapidly changing technology, evolving industry standards and
frequent new product introductions and enhancements. For example,
the Company believes that the 1995 introduction by Key Technology,
Inc. of its new line of vision sorting equipment adversely
affected bookings in late 1995 and early 1996. Sales of products
such as those offered by the Company depend in part on the
continuing development and deployment of emerging technology and
new services and applications based on such technology. The
Company's success will depend to a significant extent upon its
ability to enhance its existing products and develop new products
that gain market acceptance. There can be no assurance that the
Company will be successful in selecting, developing and
manufacturing new products or enhancing its existing products on a
timely or cost-effective basis or that products or technologies
developed by others will not render the Company's products
noncompetitive or obsolete. Moreover, the Company may encounter
technical problems in connection with its product development that
could result in the delayed introduction of new products or
product enhancements. Failure to develop or introduce on a timely
basis new products or product enhancements that achieve market
acceptance would materially and adversely affect the Company's
business, operating results and financial condition.
Market Acceptance of New Products: The Company's future
operating results will depend upon its ability to successfully
introduce and market, on a timely and cost-effective basis, new
products and enhancements to existing products. There can be no
assurance that new products or enhancements, if developed and
manufactured, will achieve market acceptance. The Company is
currently in the initial prototype stage of development on its
AVP, a high speed software and digital signal processing
technology designed to significantly improve system performance.
There can be no assurance that a market for AVP systems will
develop (i.e. that a need for AVP systems will exist, that AVP
will be favored over other products on the market, etc.) or, if a
market does develop, that the Company will be able, financially or
operationally, to market and support AVP systems successfully.
Dependence on Certain Markets and Expansion Into New Markets:
The future success and growth of the Company is dependent upon
continuing sales in domestic and international food processing
market as well as successful penetration of other existing and
potential markets. A substantial portion of the Company's
historical sales has been in the potato and vegetable processing
markets. Reductions in capital equipment expenditures by such
processors due to commodity surpluses, product price fluctuations,
changing consumer preferences or other factors could have an
adverse effect on the Company's results of operations. The Company
also intends to expand the marketing of its processing systems in
additional food markets such as meat and granular food products,
as well as nonfood markets such as plastics, wood products and
tobacco, and to expand its sales activities in foreign markets.
There can be no assurance that the Company can successfully
penetrate these additional food and nonfood markets or expand
further in foreign markets.
Lengthy Sales Cycle: The sales cycle in the marketing and
sale of the Company's machine vision systems, especially in new
markets or in a new application, is lengthy and can be as long as
three years. Even in existing markets, due to the $100,000 to
$450,000 price range for each system, the purchase of a machine
vision system can constitute a substantial capital investment for
a customer (which may need more than one machine for its
particular proposed application) requiring lengthy consideration
and evaluation. In particular, a potential customer must develop a
high degree of assurance that the product will meet its needs,
successfully interface with the customer's own manufacturing,
production or processing system, and have minimal warranty, safety
and service problems. Accordingly, the time lag from initiation of
marketing efforts to final sales can be lengthy.
Competition: The markets for the Company's products are
highly competitive. A major competitor of the Company has recently
made a new product introduction which has increased the
competition that the Company faces. Some of the Company's
competitors may have substantially greater financial, technical,
marketing and other resources than the Company. Important
competitive factors in the Company's markets include price,
performance, reliability, customer support and service. Although
the Company believes that it currently competes effectively with
respect to these factors, there can be no assurance that the
Company will be able to continued to compete effectively in the
future.
Dependence upon Certain Suppliers: Certain key components and
subassemblies used in the Company's products are currently
obtained from sole sources or a limited group of suppliers, and
the Company does not have any long-term supply agreements to
ensure an uninterrupted supply of these components. Although the
Company seeks to reduce dependence on sole or limited source
suppliers, the inability to obtain sufficient sole or limited
source components as required, or to develop alternative sources
if and as required, could result in delays or reductions in
product shipments which could materially and adversely affect the
Company's results of operations and damage customer relationships.
The purchase of certain of the components used in the Company's
products require an 8 to 12 week lead time for delivery. An
unanticipated shortage of such components could delay the
Company's ability to timely manufacture units, damage customer
relations, and have a material adverse effect on the Company. In
addition, a significant increase in the price of one or more of
these components or subassemblies could adversely affect the
Company's results of operations.
Dependence upon Significant Customers and Distribution
Channel: The Company sold equipment to two unaffiliated customers
each totaling 20% of sales in 1995. Sales to a third unaffiliated
customer totaled 15% of sales in 1994. The Company usually
receives orders of from one to several machine vision systems, but
occasionally receives larger orders. While the Company strives to
create long-term relationships with its customers and
distribution, there can be no assurance that they will continue
ordering additional systems from the Company. The Company may
continue to be dependent on a small number of customers and
distributors, the loss of which would adversely affect the
Company's business.
Risk of International Sales: Due to its export sales (from
the U.S. in the case of SRC, or from the Netherlands in the case
of Pulsarr), the Company is subject to the risks of conducting
business internationally, including unexpected changes in
regulatory requirements; fluctuations in the value of the U. S.
dollar or Dutch guilder, which could increase the sales prices in
local currencies of the Company's products in international
markets; delays in obtaining export licenses, tariffs and other
barriers and restrictions; and the burdens of complying with a
variety of international laws. In addition, the laws of certain
foreign countries may not protect the Company's intellectual
property rights to the same extent as do the laws of the United
States or the Netherlands.
Fluctuations in Quarterly Operating Results; Seasonality: The
Company has experienced and may in the future experience
significant fluctuations in revenues and operating results from
quarter to quarter as a result of a number of factors, many of
which are outside the control of the Company. These factors
include the timing of significant orders and shipments, product
mix, delays in shipment, capital spending patterns of customers,
competition and pricing, new product introductions by the Company
or its competitors, the timing of research and development
expenditures, expansion of marketing and support operations,
changes in material costs, production or quality problems,
currency fluctuations, disruptions in sources of supply,
regulatory changes and general economic conditions. These factors
are difficult to forecast, and these or other factors could have a
material adverse effect on the Company's business and operating
results. Moreover, due to the relatively fixed nature of many of
the Company's costs, including personnel and facilities costs, the
Company would not be able to reduce costs in any quarter to
compensate for any unexpected shortfall in net sales, and such a
shortfall would have a proportionately greater impact on the
Company's results of operations for that quarter. For example, a
significant portion of the Company's quarterly net sales depends
upon sales of a relatively small number of high-priced systems.
Thus, changes in the number of such high-priced systems shipped in
any given quarter can produce substantial fluctuations in net
sales, gross profits, and net income from quarter to quarter. In
addition, in the event the Company's machine vision systems'
average selling price increases, of which there can be no
assurance, the addition or cancellation of sales may exacerbate
quarterly fluctuations in revenues and operating results.
The Company's operating results may also be affected by
certain seasonal trends. The Company typically experiences lower
sales and order levels in the first quarter when compared with the
preceding fourth quarter due primarily to the seasonality of
certain harvested food items. The Company expects these seasonal
patterns to continue, though their impact on revenues will decline
as the Company continues to expand its presence in nonagricultural
and other markets which are less seasonal.
Risks Associated with Possible Acquisitions: The Company may
pursue strategic acquisitions or joint ventures in addition to the
acquisition of Pulsarr as part of its growth strategy. While the
Company has no understandings, commitments or agreements with
respect to any further acquisition, the Company anticipates that
one or more potential opportunities may become available in the
future. Acquisitions and joint ventures would require investment
of operational and financial resources and could require
integration of dissimilar operations, assimilation of new
employees, diversion of management resources, increases in
administrative costs and additional costs associated with debt or
equity financing. There can be no assurance that any acquisition
or joint venture by the Company will not have an adverse effect on
the Company's results of operations or will not result in dilution
to existing shareholders. If additional attractive opportunities
become available, the Company may decide to pursue them actively.
There can be no assurance that the Company will complete any
future acquisitions or joint ventures or that such a future
transaction will not materially and adversely affect the Company.
Dependence upon Key Personnel: The Company's success depends
to a significant extent upon the continuing contributions of its
key management, technical, sales and marketing and other key
personnel. Except for William J. Young, the Company's President
and Chief Executive Officer, Alan R. Steel, the Company's Chief
Financial Officer, Dr. James Ewan, SRC's President and Chief
Executive Officer, and Jan C. Scholt, Pulsarr's Managing Director,
the Company does not have long-term employment agreements or other
arrangements with such individuals which would encourage them to
remain with the Company. The Company's future success also depends
upon its ability to attract and retain additional skilled
personnel. Competition for such employees is intense. The loss of
any current key employees or the inability to attract and retain
additional key personnel could have a material adverse effect on
the Company's business and operating results. There can be no
assurance that the Company will be able to retain its existing
personnel or attract such additional skilled employees in the
future.
Intellectual Property: The Company's competitive position may
be affected by its ability to protect its proprietary technology.
Although the Company has a number of United States and foreign
patents, there can be no assurance that any such patents will
provide meaningful protection for its product innovations. The
Company may experience additional intellectual property risks in
international markets where it may lack patent protection.
Product Liability and Other Legal Claims: From time to time,
the Company may be involved in litigation arising out of the
normal course of its business, including product liability and
other legal claims. While the Company has a general liability
insurance policy which includes product liability coverage up to
an aggregate amount of $10 million, there can be no assurance that
the Company will be able to maintain product liability insurance
on acceptable terms or that its insurance will provide adequate
coverage against potential claims in the future. There can be no
assurance that third parties will not assert infringement claims
against the Company, that any such assertion of infringement will
not result in litigation or that the Company would prevail in such
litigation. Furthermore, litigation, regardless of its outcome,
could result in substantial cost to and diversion of effort by the
Company. Any infringement claims or litigation against the Company
could materially and adversely affect the Company's business,
operating results and financial condition. If a substantial
product liability or other legal claim against the Company were
sustained that was not covered by insurance, there could be an
adverse effect on the Company's financial condition and
marketability of the affected products.
Warranty Exposure and Performance Specifications: The Company
generally provides a one-year limited warranty on its products. In
addition, for certain custom-designed systems, the Company
contracts to meet certain performance specifications for a
specific application. In the past, the Company has incurred higher
warranty expenses related to new products than it typically incurs
with established products. There can be no assurance that the
Company will not incur substantial warranty expenses in the future
with respect to new products, as well as established products, or
with respect to its obligations to meet performance
specifications, which may have an adverse effect on its results of
operations and customer relationships.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Ford & Cohn
In March 1993, Wilson Ford, Robert Paul and Maxwell Cohn
(together "Claimants") brought various claims against ARC and
William Patridge, Asif Ahmad and Nagaraj Murthy, past or current
directors or employees of ARC, in lawsuits in the Superior Courts
for Los Angeles County and Orange County, California. The lawsuits
were consolidated in February, 1994, and were litigated in
Superior Court for Los Angeles County in September and October,
1995.
Ford, a consultant to ARC, claims that ARC breached an
agreement dated September 17, 1987, and subsequently amended on
August 16, 1988, by which he was to receive 25,000 shares of stock
of CNVS, Inc., predecessor to ARC, at no cost and an option to
purchase 25,000 additional shares in the future upon the
occurrence of specified events. Ford claims he was promised that
this total of 50,000 shares in the Company would amount to 5% of
the outstanding shares. Ford also claims ARC owes him royalties
under a royalty agreement for certain low light video camera
technology. ARC contends that Ford was never promised that his
interest would amount to 5% of the outstanding shares, that Ford
failed to fulfill his obligations under the royalty agreement, and
that Ford's claims are barred under various legal theories. Based
on these allegations, Ford made claims for breach of contract and
breach of the covenant of good faith and fair dealing.
The Claimants contend that statements allegedly made by
William Patridge and Asif Ahmad to United States Alcohol Testing
of America, Inc. ("USAT") caused USAT to rescind an Asset Purchase
Agreement with the Claimants. The Claimants allege that the
statements concerning outstanding lawsuits and disputes between
ARC and the Claimants were false and meant to disrupt the business
relationship between Prime Lasertech and USAT. The Claimants
allegedly would have benefited from the Asset Purchase Agreement
as shareholders and/or licensees. Based on these allegations, the
Claimants made claims for intentional and negligent interference
with prospective advantage, intentional and negligent infliction
of emotional distress, and civil conspiracy.
On October 2, 1995, a jury awarded $375,000 to the Claimants,
which included $281,000 of punitive damages for the breach of
contract claim. The Company has filed motions with the court to
eliminate the punitive portion of the award. ARC believes such
damages are improper because (i) the claimants did not ask for
punitive damages in the contract claim, and (ii) such damages
cannot be awarded for breach of contract under applicable state
laws. ARC is also attempting to overturn the balance of the breach
of contract award based on the fact that the claim was made after
the statute of limitations had expired. ARC has made an appeal to
overturn the verdict on these factors and certain other
irregularities that occurred during the trial, which ARC believes
unfairly affected the jury's decision. Due to the fact that a
verdict was rendered, a $93,000 loss on the breach of
contract claim was recorded as a liability in the fourth quarter of 1995.
Other
ARC is a party to several other suits in the ordinary course
of its business. ARC believes that the outcome of all such
proceedings, even if determined adversely to ARC, will not have a
material adverse effect upon its financial statements.
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits
Exhibit
Number Description
10.1 Stock Purchase Agreement dated March 1, 1996 (without
exhibits), between Meijn Beheer B.V. and ARC Netherlands
B.V., a wholly owned subsidiary of the Company. (1)
10.2 Stock Purchase Agreement dated March 1, 1996, between
J. C. Scholt and ARC Netherlands B.V., a wholly owned
subsidiary of the Company. (1)
10.3 Convertible Note dated March 1, 1996, issued in
connection with that certain Stock Purchase Agreement
dated March 1, 1996, between J. C. Scholt and ARC
Netherlands b.v. (1)
10.4 Subscription Agreement dated January 18, 1996, between
the Company and Swiss American Securities, Inc. as
agent for Credit Suisse related to the private placement
of 1,400,000 shares of the Company's Class A Common
Stock. (1)
10.5 Convertible Secured Note dated April 17, 1996, between
the Company and Ilverton International, Inc.
10.6 Form of Class G Warrant Agreement. (2)
10.7 Form of Class H Warrant Agreement.
_______________________________
(1) Filed with the SEC on March 6, 1996, as an exhibit to
the Company's Form 8-K dated March 1, 1996.
(2) Filed with the SEC on April 14, 1996, as an exhibit to
the Company's Form 10-K for the year ended December 31,
1995.
(b) Reports on Form 8-K:
On January 26, 1996, a Form 8-K was filed regarding a
letter of intent to acquire Pulsarr Holding B.V., and a
Subscription Agreement for the dale of 1,400,000 shares
of Class A Stock.
On February 16, 1996, a Form 8-K was filed regarding
redemption by the Company of 497,094 shares of its Class
E Common Stock and the expiration of 3,002,906 Class E
Warrants.
On March 6, 1996, a Form 8-K was filed regarding the
acquisition of Pulsarr Holding B.V. and completion of
the sale of 1,400,000 shares of Class A Common Stock.
On May 13, 1996, a Form 8-K-A was filed regarding the
acquisition of Pulsarr Holding B.V. to include audited
financial statements of the business acquired and
related pro forma financial information.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
May 14, 1996 /s/ Alan R. Steel
___________________ ________________________
Alan R. Steel
Vice President - Finance
(Principal Financial and duly
Authorized Officer)
THESE WARRANTS AND ANY SHARES OF CLASS A COMMON STOCK
ISSUABLE UPON THEIR EXERCISE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"). THESE WARRANTS ARE NOT TRANSFERABLE, AND ANY
SHARES OF CLASS A COMMON STOCK ISSUABLE UPON THEIR
EXERCISE MAY NOT BE TRANSFERRED UNTIL (1) A
REGISTRATION STATEMENT UNDER THE ACT SHALL HAVE BECOME
EFFECTIVE WITH RESPECT THERETO, OR (2) RECEIPT BY THE
ISSUER OF AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE ISSUER TO THE EFFECT THAT
REGISTRATION UNDER THE ACT IS NOT REQUIRED IN
CONNECTION WITH SUCH PROPOSED TRANSFER AND THAT SUCH
PROPOSED TRANSFER IS NOT IN VIOLATION OF ANY
APPLICABLE STATE SECURITIES LAWS.
CLASS H WARRANT
TO PURCHASE CLASS A COMMON STOCK
Warrant No. ____
This Warrant issued by ARC Capital, a California
corporation (the "Company"), as of _________, 1996,
entitles __________________ (the registered "Holder")
to purchase 300,000 shares of the Company's Class A
Common Stock at an initial purchase price of $2.125
per share (the "Purchase Price").
This Warrant is one in a series of Class H Warrants,
which in the aggregate entitles the Holders thereof to
purchase up to 300,000 shares of Class A Common Stock.
The Class H Warrants were issued in connection with
the issuance of a convertible secured note (the
"Note") dated April ____, 1996, between the Company
and Ilverton International, Ltd.
SECTION 1. Definitions. As used herein, the
following terms shall have the following meanings,
unless the context shall otherwise require:
(a) "Common Stock" shall mean the Class A Common
Stock of the Company, whether now or hereafter
authorized.
(b) "Corporate Office" shall mean the office of the
Company at which at any particular time its principal
business shall be administered, which office is
located at the date hereof at 2067 Commerce Drive,
Medford, Oregon 97504, Attention: President.
(c) "Exercise Date" shall mean the date on which the
Company shall have received both (a) the Warrant, with
an exercise form acceptable to the Company and duly
executed by the Registered Holder thereof or his
attorney duly authorized in writing, and (b) payment
in cash, or by official bank or certified check made
payable to the Company, of an amount in lawful money
of the United States of America equal to the
applicable Purchase Price.
(d) "Initial Warrant Exercise Date" shall mean
____________, 1996.
(e) "Purchase Price" shall mean the purchase price to
be paid per share of Common Stock upon exercise of
each Warrant in accordance with the terms hereof,
which price shall be $2.125, subject to adjustment
from time to time pursuant to the provisions of
Section 7 hereof, and subject to the Company's right
to reduce the Purchase Price upon notice to all
Registered Holders.
(f) "Registered Holders" shall mean the persons in
whose names the Warrants shall be registered on the
books maintained by the Company.
(g) "Warrant Expiration Date" shall mean 5:00 P.M.
(Oregon time) on _________________, 2001; provided
that if such date shall in the State of Oregon be a
holiday or a day on which banks are authorized to
close, then 5:00 P.M. (Oregon time) on the next
following day which in the State of Oregon is not a
holiday or a day on which banks are authorized to
close. Upon notice to all Registered Holders the
Company shall have the right to extend the Warrant
Expiration Date.
SECTION 2. Warrants and Issuance of Warrant
Agreements.
(a) This Warrant initially entitles the Registered
Holder to purchase an aggregate of 300,000 shares of
Common Stock upon the exercise thereof, in accordance
with the terms hereof, subject to modification and
adjustment as provided in Section 7.
(b) From time to time, up to the Warrant Expiration
Date, the Company shall execute and deliver Warrants
in required whole number denominations to the persons
entitled thereto in connection with any exchange
permitted under this Warrant; provided that no Warrant
shall be issued except (i) those initially issued
hereunder; (ii) those issued on or after the Initial
Warrant Exercise Date, upon the partial exercise of
this Warrant, to evidence any unexercised Warrants
held by the exercising Registered Holder; (iii) those
issued upon any exchange pursuant to Section 5; (iv)
those issued in replacement of lost, stolen, destroyed
or mutilated Warrants pursuant to Section 6; and (v)
at the option of the Company, in such form as may be
approved by its Board of Directors, to reflect (a) any
adjustment or change in the Purchase Price or the
number of shares of Common Stock purchasable upon
exercise of the Warrants made pursuant to Section 7
hereof, and (b) other modifications approved by
Registered Holders.
SECTION 3. Form and Execution of Warrants; Exercise
of Warrants.
(a) Warrants shall be executed on behalf of the
Company by its Chairman of the Board, President, any
Vice President or Chief Financial Officer by manual
signatures. In case any officer of the Company who
shall have signed any of the Warrants shall cease to
be such officer of the Company before the date of
issuance of the Warrants and issue and delivery
thereof, such Warrants may nevertheless be issued and
delivered with the same force and effect as though the
person who signed such Warrants had not ceased to be
such officer of the Company. After execution by the
Company, each Warrant shall then be delivered to the
Registered Holder.
(b) Each Warrant may be exercised by the Registered
Holder thereof at any time on or after the Initial
Warrant Exercise Date, but not after the Warrant
Expiration Date, upon the terms and subject to the
conditions set forth herein. A Warrant shall be
deemed to have been exercised immediately prior to the
close of business on the Exercise Date and the person
entitled to receive the securities deliverable upon
such exercise shall be treated for all purposes as the
holder upon exercise thereof as of the close of
business on the Exercise Date. As soon as practicable
on or after the Exercise Date the Company shall
deposit the proceeds received from the exercise of a
Warrant, and promptly after clearance of checks
received in payment of the Purchase Price pursuant to
such Warrants, cause to be issued and delivered by the
Company's transfer agent, to the person or persons
entitled to receive the same, a certificate or
certificates for the securities deliverable upon such
exercise (plus a Warrant for any remaining unexercised
Warrants of the Registered Holder).
SECTION 4. Reservation of Shares; Payment of Taxes;
etc.
(a) The Company covenants that it will at all times
reserve and keep available out of its authorized
Common Stock, solely for the purpose of issue upon
exercise of the Warrants, such number of shares of
Common Stock as shall then be issuable upon the
exercise of all outstanding Warrants. The Company
covenants that all shares of Common Stock which shall
be issuable upon exercise of the Warrants and payment
of the Purchase Price shall, at the time of delivery,
be duly and validly issued, fully paid, nonassessable
and free from all taxes, liens and charges with
respect to the issue thereof (other than those which
the Company shall promptly pay or discharge).
(b) The Company will use reasonable efforts to obtain
appropriate approvals or registrations under state
"blue sky" securities laws with respect to the
exercise of the Warrants; provided, however, that the
Company shall not be obligated to file any general
consent to service of process or qualify as a foreign
corporation in any jurisdiction. With respect to any
such securities laws, however, Warrants may not be
exercised by, or shares of Common Stock issued to, any
Registered Holder in any state in which such exercise
would be unlawful.
(c) The Company shall pay all documentary, stamp or
similar taxes and other governmental charges that may
be imposed with respect to the issuance of the
Warrants, or the issuance, or delivery of any shares
upon exercise of the Warrants; provided, however, that
if the shares of Common Stock are to be delivered in a
name other than the name of the Registered Holder of
the Warrant being exercised, then no such delivery
shall be made unless the person requesting the same
has paid to the Company the amount of transfer taxes
or charges incident thereto, if any.
SECTION 5. Exchange of Warrant.
(a) This Warrant may be exchanged for other Warrants
representing an equal aggregate number of Warrants of
the same type. Warrants to be exchanged shall be
surrendered to the Company at its Corporate Office,
and upon satisfaction of the terms and provisions
hereof, the Company shall execute, issue and deliver
in exchange therefor the Warrant or Warrants which the
Registered Holder making the exchange shall be
entitled to receive.
(b) The Company shall keep at its office books in
which it shall register the Warrants in accordance
with its regular practice.
(c) The Company may require payment by such holder of
a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection
therewith.
(d) All Warrants surrendered for exercise or for
exchange in case of mutilated Warrants shall be
promptly canceled by the Company and thereafter
retained by the Company until the Warrant Expiration
Date, or such other time as the Company shall
determine solely within its discretion.
SECTION 6. Loss or Mutilation. Upon receipt by the
Company of evidence satisfactory to them of the
ownership of and loss, theft, destruction or
mutilation of any Warrant and (in case of loss, theft
or destruction) of indemnity satisfactory to them, and
(in case of loss, theft or destruction) upon surrender
and cancellation thereof, the Company shall execute
and deliver to the Registered Holder in lieu thereof a
new Warrant of like tenor representing an equal
aggregate number of Warrants. Applicants for a
substitute Warrant shall comply with such other
reasonable regulations and pay such other reasonable
charges as the Company may prescribe or require.
SECTION 7. Adjustment of Exercise Price and Number of
Shares of Common Stock or Warrants.
(a) Subject to Section (f) and the exceptions referred
to in Section 7(e) below, in the event the Company
shall, at any time or from time to time after the date
hereof, subdivide or combine the outstanding shares of
Common Stock into a greater or lesser number of shares
(any such subdivision or combination being herein
called a "Change of Shares"), then, and thereafter
upon each further Change of Shares, the Purchase Price
in effect immediately prior to such Change of Shares
shall be changed to a price (including any applicable
fraction of a cent) determined by multiplying the
Purchase Price in effect immediately prior thereto by
a fraction, the numerator of which shall be the sum of
the number of shares of Common Stock outstanding
immediately prior to such subdivision or combination,
and the denominator of which shall be the sum of the
number of shares of Common Stock outstanding
immediately after such subdivision or combination.
Such adjustment shall be made successively whenever
such subdivision or combination is made.
Upon each adjustment of the Purchase Price pursuant to
this Section 7, the total number of shares of Common
Stock purchasable upon the exercise of each Warrant
shall (subject to the provisions contained in Section
7(b) hereof) be such number of shares of Common Stock
purchasable at the Purchase Price immediately prior to
such adjustment multiplied by a fraction, the
numerator of which shall be the Purchase Price in
effect immediately prior to such adjustment and the
denominator of which shall be the Purchase Price in
effect immediately after such adjustment.
(b) The Company may elect, upon any adjustment of the
Purchase Price hereunder, to adjust the number of
Warrants outstanding, in lieu of the adjustment in the
number of shares of Common Stock purchasable upon the
exercise of each Warrant as hereinabove provided, so
that each Warrant outstanding after such adjustment
shall represent the right to purchase one share of
Common Stock. Each Warrant held of record prior to
such adjustment of the number of Warrants shall become
that number of Warrants determined by multiplying the
number one by a fraction, the numerator of which shall
be the Purchase Price in effect immediately prior to
such adjustment and the denominator of which shall be
the Purchase Price in effect immediately after such
adjustment. Upon each adjustment of the number of
Warrants pursuant to this Section 7, the Company
shall, as promptly as practicable, cause to be
distributed to the Registered Holder of a Warrant on
the date of such adjustment a Warrant evidencing,
subject to Section 8 hereof, the number of additional
Warrants to which such Holder shall be entitled as a
result of such adjustment or, at the option of the
Company, cause to be distributed to such Holder in
substitution and replacement for the Warrant held by
him prior to the date of adjustment (and upon
surrender thereof, if required by the Company) a new
Warrant evidencing the number of Warrants to which
such Holder shall be entitled after such adjustment.
(c) Irrespective of any adjustments or changes in the
Purchase Price or the number of shares of Common Stock
purchasable upon exercise of the Warrants, the Warrant
or Warrants theretofore and thereafter issued shall,
unless the Company shall exercise its option to issue
a new Warrant pursuant to Section 7(b) hereof,
continue to express the Purchase Price per share and
the number of shares purchasable thereunder as they
were expressed in the Warrant when it was originally
issued.
(d) After each adjustment of the Purchase Price
pursuant to this Section 7, the Company will promptly
prepare a certificate signed by the President, and by
the Chief Financial Officer, Controller, Treasurer or
an Assistant Treasurer or the Secretary or an
Assistant Secretary, of the Company setting forth: (i)
the Purchase Price as so adjusted, (ii) the number of
shares of Common Stock purchasable upon exercise of
each Warrant after such adjustment, and, if the
Company shall have elected to adjust the number of
Warrants, the number of Warrants to which the
Registered Holder of each Warrant shall then be
entitled, and (iii) a brief statement of the facts
accounting for such adjustment. The Company will
promptly cause a brief summary thereof to be sent by
ordinary first class mail to each Registered Holder of
Warrants at his last address as it shall appear in the
registry books of the Company. No failure to mail
such notice nor any defect therein or in the mailing
thereof shall affect the validity thereof except as to
the Holder to whom the Company failed to mail such
notice, or except as to the holder whose notice was
defective. The affidavit of the Secretary or an
Assistant Secretary of the Company that such notice
has been mailed shall, in the absence of fraud, be
prima facie evidence of the facts stated therein.
(e) For purposes of Section 7(a) and 7(b) hereof, the
following provisions shall also be applicable:
(A) The number of shares of Common Stock
outstanding at any given time shall include shares of
Common Stock owned or held by or for the account of
the Company and the sale or issuance of such treasury
shares or the distribution of any such treasury shares
shall not be considered a Change of Shares for
purposes of said sections.
(B) No adjustment of the Purchase Price shall be
made unless such adjustment would require an increase
or decrease of at least $.25 in such price; provided
that any adjustments which by reason of this clause
(B) are not required to be made shall be carried
forward and shall be made at the time of and together
with the next subsequent adjustment which, together
with any adjustment(s) so carried forward, shall
require an increase or decrease of at least $.25 in
the Purchase Price then in effect hereunder.
(f) Any determination as to whether an adjustment in
the Purchase Price in effect hereunder is required
pursuant to Section 7, or as to the amount of any such
adjustment, if required, shall be binding upon the
holders of the Warrants and the Company if made in
good faith by the Board of Directors of the Company.
(g) If and whenever the Company shall declare any
dividends or distributions or grant to the holders of
Common Stock, as such, rights or warrants to subscribe
for or to purchase, or any options for the purchase
of, Common Stock or securities convertible into or
exchangeable for or carrying a right, warrant or
option to purchase Common Stock, the Company shall
notify each of the then Registered Holders of the
Warrants of such event prior to its occurrence to
enable such Registered Holders to exercise their
Warrants and participate as holders of Common Stock in
such event.
SECTION 8. Fractional Warrants and Fractional Shares.
(a) If the number of shares of Common Stock
purchasable upon the exercise of each Warrant is
adjusted pursuant to Section 7 hereof, the Company
shall nevertheless not be required to issue fractions
of shares, upon exercise of the Warrants or
otherwise, or to distribute certificates that evidence
fractional shares. With respect to any fraction of a
share called for upon any exercise hereof, the Company
shall pay to the Holder an amount in cash equal to
such fraction multiplied by the current market value
of such fractional share, determined as follows:
(A) If the Common Stock is listed on a national
securities exchange or admitted to unlisted trading
privileges on such exchange or listed for trading on
the National Market System of NASDAQ ("NMS"), the
current value shall be the last reported sale price of
the Common Stock on such exchange on the last business
day prior to the date of exercise of this Warrant or
if no such sale is made on such day or no closing sale
price is quoted, the average of the closing bid and
asked prices for such day on such exchange or system;
or
(B) If the Common Stock is listed in the over-
the-counter market (other than on NMS) or admitted to
unlisted trading privileges, the current value shall
be the mean of the last reported bid and asked prices
reported by the National Quotation Bureau, Inc. on the
last business day prior to the date of the exercise of
this Warrant; or
(C) If the Common Stock is not so listed or
admitted to unlisted trading privileges and bid and
asked prices are not so reported, the current value
shall be an amount determined in such reasonable
manner as may be prescribed by the Board of Directors
of the Company.
SECTION 9. Warrantholder Not Deemed Stockholder. No
holder of Warrants shall, as such, be entitled to vote
or to receive dividends or be deemed the holder of
Common Stock that may at any time be issuable upon
exercise of such Warrants for any purpose whatsoever,
nor shall anything contained herein be construed to
confer upon the holder of Warrants, as such, any of
the rights of a stockholder of the Company or any
right to vote for the election of directors or upon
any matter submitted to stockholders at any meeting
thereof, or to give or withhold consent to any
corporate action (whether upon any recapitalization,
issue or reclassification of stock, change of par
value or change of stock to no par value,
consolidation, merger or conveyance or otherwise), or
to receive notice of meetings, or to receive dividends
or subscription rights, until such Holder shall have
exercised such Warrants and been issued shares of
Common Stock in accordance with the provisions hereof.
SECTION 10. Rights of Action. All rights of action
with respect to this Warrant are vested in the
Registered Holder of the Warrants, and the Registered
Holder of a Warrant, without consent of the holder of
any other Warrant, may, on his own behalf and for his
own benefit, enforce against the Company his right to
exercise his Warrants for the purchase of shares of
Common Stock in the manner provided in this Warrant.
SECTION 11. Agreement of Warrantholder. Every holder
of a Warrant, by his acceptance thereof, consents and
agrees with the Company that the Company may deem and
treat the person in whose name the Warrant is
registered as the holder and as the absolute, true and
lawful owner of the Warrants represented thereby for
all purposes, and the Company shall not be affected by
any notice or knowledge to the contrary, except as
otherwise expressly provided in Section 6 hereof.
SECTION 12. Gender; Singular and Plural. When the
context and construction so require, all words used in
the singular herein shall be deemed to have been used
in the plural and the masculine shall include the
feminine and neuter and vice versa.
SECTION 13. Governing Law. This Warrant shall be
governed by and construed in accordance with the laws
of the State of California, without reference to
principles of conflict of laws.
SECTION 14. Notices. All notices, requests, consents
and other communications hereunder shall be in writing
and shall be deemed to have been made when delivered
or mailed first class registered or certified mail,
postage prepaid, as follows: if to the Registered
Holder of a Warrant, at the address of such holder as
shown on the registry books maintained by the Company;
if to the Company, at 2067 Commerce Drive, Medford,
Oregon 97504, Attention: President.
SECTION 15. Binding Effect. This Warrant shall be
binding upon and inure to the benefit of the Company
(and its respective successors and assigns) and the
holders from time to time of Warrants. Nothing in
this Warrant is intended or shall be construed to
confer upon any other person any right, remedy or
claim, in equity or at law, or to impose upon any
other person any duty, liability or obligation.
SECTION 16. Termination. This Warrant shall
terminate at the close of business on the Warrant
Expiration Date.
ARC CAPITAL
By:_________________________
Alan R. Steel
CONVERTIBLE SECURED NOTE
$3,400,000 Date: April 17, 1996
FOR VALUE RECEIVED, ARC Capital, a California
corporation ("Maker") hereby promises to pay to the
order of Ilverton International, Inc. ("Payee") the
principal sum of THREE MILLION FOUR HUNDRED THOUSAND
Dollars ($3,400,000) in lawful money of the United
States of America, together with interest on the
unpaid principal balance according to the terms and
subject to the conditions set forth in this
Convertible Secured Note (this "Note").
1. INTEREST
This Note shall bear interest at the rate of
6.75% per annum. If the closing price of the Maker's
Class A Common Stock ("Stock") as quoted by NASDAQ
for any 30 consecutive days (hereinafter referred to
as the "Market Price") during the 12 months
following the date of this Note does not equal at
least $2.50 per share (failure to meet this $2.50
price level is hereinafter referred to as the
"Market Price Deficit Condition"), or the Market
Price during any succeeding 12 month period
following the first anniversary of the note does not
equal at least $2.50 per share, then the interest
rate will be raised by 3% on the next anniversary
date of the Note. Additionally, the interest rate
will be increased by .5% on each of the second,
third and fourth anniversary dates if the Market
Price during the indicated period fails to reach the
Market Price targets below:
Market
Period Price Target
Between the first and second
anniversary dates $ 3.00
Between the second and third
anniversary dates 3.50
Between the third and fourth
anniversary dates 4.00
Interest on the principal balance of this Note
from time to time outstanding will be computed on
the basis of a 365-day year and actual days elapsed
from the date of this Note until converted or paid
in accordance with this Note. In no event shall the
interest rate exceed the maximum allowable by Oregon
or any other applicable law.
2. PAYMENT
Interest will be payable quarterly on July 17,
October 17, January 17, and April 17 of each year,
in arrears. Principal will be paid in one
installment on April 16, 2001 ("Maturity Date"). All
payments will be made by Maker to Payee at such
place as Payee shall designate by written notice to
the undersigned.
3. PREPAYMENT
(a) On or before the first anniversary date of this
Note, the Maker may, at its option and upon 15 days
prior written notice to Payee, prepay the principal
amount hereof with a prepayment penalty of 20% of
the principal amount of the note.
(b) The Maker may, at its option and upon 15 days
prior written notice to the Payee, prepay the
principal amount hereof in whole at any time after
12 months from the date of this Note, but only if
the Market Price during the 12 months before the
prepayment exceeds $4.00 per share.
(c) Notwithstanding Sections 3(a) or 3(b), the
Maker may, at its option and upon 15 days prior
written notice to the Payee, prepay the principal
amount hereof in whole or in part at any time
concurrent with or after an initial public offering
("IPO") of stock of Maker's SRC Vision, Inc. and/or
Pulsarr Holding b.v. subsidiary/ies ("Subsidiary")
provided, however, that if the Market Price during
the 30 days immediately prior to prepayment is less
than $3.00, a prepayment penalty of 10% of the
principal amount of the Note (or portion thereof) to
be prepaid will be due Payee.
4. CONVERSION OF NOTE
At any time prior to the Maturity Date, but not
earlier than six months from the date hereof, the
Payee will be entitled to convert all, or increments
of $500,000 or more principal amount, of the Note at
the principal amount thereof, into shares of Stock
of the Maker, at the price of $2.125 per share (the
"Conversion Price"). If a Market Price Deficit
Condition exists on the first anniversary date of
the Note, the Conversion Price will be reset to an
amount equal to the highest average closing price of
the Stock for any 30 consecutive days within the 12
months following the date of this Note. No payment
or adjustment will be made on conversion of the Note
for interest accrued thereon. The Maker is not
required to issue fractional shares of Stock upon
conversion of the Note and, in lieu thereof, will
pay a cash adjustment based upon the market price of
the Stock on the last business day prior to the date
of conversion.
(a) If the Maker (i) pays a dividend or makes a
distribution on its Stock in shares of its Stock;
(ii) subdivides its outstanding shares of Stock into
a greater number of shares, or; (iii) combines its
outstanding shares of Stock into a smaller number of
shares; then the conversion privilege and the
Conversion Price in effect immediately prior to such
action shall be adjusted so that the Payee may
receive the number of shares of Stock which he would
have owned immediately following such action if he
had converted the Note immediately prior to such
action.
The adjustment shall become effective immediately
after the record date in the case of a dividend and
immediately after the effective date in the case of
a subdivision or combination.
(b) The Shares issued upon conversion of the Notes
(after the 40-day holding period) will contain no
restrictive legend and will not be the subject of
any stop transfer direction or order.
(c) As soon as practicable, but not later than six
months after the date of this Note, Maker shall
register the Stock that may be issued upon
conversion of this Note pursuant to the Securities
Act of 1933 on a form which permits the registration
of such securities (other than on Forms S-4, S-8 or
similar forms).
(d) Notwithstanding any other provision of this
Section 4, Payee shall not have the right to convert
any amount of the Note into Stock upon prepayment
made pursuant to Section 3(a) above, provided that
such prepayment is made in connection with the
acquisition by another party of at least 50% of the
outstanding Stock of the Maker or a substantial
portion of the Maker's assets.
5. SENIORITY
The debt represented by this Note shall be senior to
all other Debt in that any distribution of the
assets of the Maker upon any dissolution, winding
up, liquidation or reorganization of the Maker, the
holders of the Note will be entitled to receive
payment in full of all amounts due before other
creditors are entitled to receive any payment,
except where other Debt is secured.
"Debt" means any indebtedness, contingent or
otherwise, in respect of borrowed money (whether or
not the security of the lender is to the whole of
the assets of the Maker or only a portion thereof),
or evidenced by bonds, notes, debentures or similar
instruments or letters of credit, or representing
the deferred and unpaid balance of the purchase
price of any property or interest therein, including
any such balance that constitutes a trade payable or
an accrued liability, if and to the extent such
indebtedness would appear as a liability upon a
balance sheet of the Maker in accordance with
generally accepted accounting principles.
The Maker will be permitted to borrow money or incur
additional Debt after the date hereof, but no other
Debt that is senior to or parri pasu with the Note
except for Debt secured by accounts receivable
and/or inventory.
6. DEFAULT AND REMEDIES
(a) Events of Default. An Event of Default
hereunder shall mean (i) a default in the payment of
any installment of principal and interest hereof, as
and when due and payable, and be continuing for a
period of 15 days following written notice thereof
by Payee to Maker, or (ii) failure of the Maker to
file the registration statement provided in 4(c)
above.
(b) Remedies. At any time after the occurrence of
an Event of Default until such time as the Event of
Default is cured and no longer existing, the Payee
may, by written notice sent to the Maker by
registered or certified mail, return receipt
requested, declare the entire amount of this Note to
be forthwith due and payable, whereupon this Note
shall become forthwith due and payable without
presentment, demand, protest or other notice of any
kind, all of which are expressly waived. Upon
acceleration by Payee, Payee shall be entitled to
all remedies available to it at law or in equity.
(c) Security Interest. This Note is secured by a
pledge of 54% of the issued and outstanding capital
stock of ARC Netherlands b.v. owned by the Maker,
consisting of 21 shares ("Security Interest"),
pursuant to a Pledge and Security Agreement of even
date herewith. Notwithstanding the preceding
sentence, if, after the granting the Security
Interest, the Market Price is $3.00 or more, the
Security Interest shall be released by the Payee. In
addition, any Security Interest granted pursuant to
this paragraph 6(c) shall be released by Payee
effective upon an initial public offering of
Subsidiary securities.
7. MISCELLANEOUS
(a) Elements of Risk. Payee recognizes that the
loan made pursuant to this Note, and the securities
that may be issued upon conversion of the Note,
involve a high degree of risk in that (i) the Maker
is an early stage company; (ii) there can be no
assurances that the Maker will sustain profitability
or generate sufficient cash flows to repay the Note;
(iii) Payee may not be able to liquidate the Stock
received upon possible conversion of the Note; (iv)
transferability of the Stock received upon possible
conversion of the Note may be extremely limited; and
(v) in the event of a disposition of the Stock
received upon possible conversion of the Note, Payee
could sustain the loss of his entire investment.
The Payee acknowledges that he has (x) prior
investment experience, including investment in non-
listed and non-registered securities, or he has
employed the services of an investment advisor,
attorney or accountant to read all of the documents
furnished or made available by the Maker to evaluate
the merits and risks of making the loan pursuant to
this Note and receiving Maker's Stock upon
conversion of the Note, and (y) that he recognizes
the highly speculative nature of this transaction
and is able to bear the economic risk he hereby
assumes.
The Payee hereby represents that he has been
furnished by the Maker during the course of this
transaction with all information regarding the Maker
which he had requested or desired to know; that all
documents which could be reasonably provided have
been made available for his inspection and review;
that he has been afforded the opportunity to ask
questions of and receive answers from duly
authorized officers of the Company concerning the
terms and conditions of the offering, and any
additional information which he had requested.
(b) Notices. Unless otherwise specified herein,
all notices and other communications given or made
pursuant to this Note shall be in writing and shall
be deemed to have been duly given if sent by
telecopy or by registered or certified mail, return
receipt requested, postage and fees prepaid, or
otherwise actually delivered to the address of the
party to whom the notice is addressed as set forth
below:
If to Maker:
ARC Capital
Attn: President
2067 Commerce Drive
Medford, OR 97504
FAX: (541) 779-6838
If to Payee:
Ilverton International, Inc.
Verena Conzettstrasse 7
CH-8004 Zurich
Switzerland
Maker and Payee may each from time to time change
its address for receiving notice by giving written
notice thereof in the manner set forth above.
(c) Amendment; Waiver. This Note shall be binding
upon and inure to the benefit of Maker and Payee and
their respective successors, heirs, assigns, and
personal representatives. No provision of this Note
may be waived unless in writing signed by Payee, and
waiver of any one provision of this Note shall not
be deemed to be a waiver of any other provision.
(d) Attorneys' Fees. If there occurs an Event of
Default, the undersigned promises to pay all
reasonable costs and expenses of collection and
attorneys' fees and court costs incurred by the
holder hereof on account of such collection, whether
or not suit is filed in relation thereto.
(e) Severability. Whenever possible, each
provision of this Note shall be interpreted in such
a manner as to be effective and valid under
applicable law, but if any provision of this Note
shall be or become prohibited or invalid under
applicable law, such provision shall be ineffective
to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision
or the remaining provisions of this Note.
(f) Headings. The section and subsection headings
contained in this Note are included for convenience
only and form no part of the agreement between the
parties.
(g) Dividends. The Maker will not, as long as any
principal amount remains outstanding under the Note,
declare or pay any dividends, or make any
distributions, on the common stock of the Maker
without prior written consent of the Payee, which
consent will not be unreasonably withheld.
(h) Governing Law. This Note shall be governed
by, and construed in accordance with, the laws of
the State of Oregon.
IN WITNESS WHEREOF, the Maker has caused this Note
to be executed by its duly authorized officer as of
the day and year first above written.
ARC CAPITAL
By: _____________________
Alan R. Steel
Chief Financial Officer
36
